HDD TAM/Build Disconnect

With fewer than 10 days left in the year, the disconnect between HDD TAM and production continues. As stated earlier this month in one of TRENDFOCUS’ Executive Briefs, the CQ4 build plan is tracking measurably higher than the expected HDD TAM. This would be less of an issue exiting CQ2 or CQ3, since the subsequent quarters tend to be relatively strong HDD TAM quarters, but exiting CQ4 is unusual given the tendency for a significant seasonal drop in HDD demand during the first calendar quarter of the year. There have been other instances when HDD build targets have exceeded the HDD TAM, but HDD companies usually come around in time to make corrections to minimize finished inventory carryover.

Exiting the quarter with higher levels of finished inventory is not necessarily the worst thing for a company, but for an industry that has been working diligently on cutting costs and improving gross margins, it seems odd that the HDD companies would continue down this path this far into the quarter. One possibility remains that HDD companies are exercising the supply chain with larger build numbers to provide more build flexibility at the HDD level given ongoing demand uncertainties. With only a few days remaining before the end of the year, if the build plans are indeed driving up finished HDD inventory, there may be larger adjustments coming after the new year.